Selling Calendars and Diagonals

Discussion in 'Options' started by mike007, Sep 21, 2009.

  1. mike007

    mike007

    Can anyone explain why it costs so much more margin to sell calendar and time spreads. Is it just basically the vol risk that makes them "expensive" to sell? Thanks.
     
  2. MTE

    MTE

    The reason is that when you go long the front month and short the back month, the back month short is considered naked as it expires after the long one.
     
  3. Reg T defines "covered for margin" purchases for a call writer as being long the underlying stock or long a call with the same expiration or longer with the same exercise price or lower. For a put it's short the underlying stock or long a put with the same expiration or longer with the same exercise price or higher.

    So for a short call calendar, while you are "covered as a writer", the powers that be consider the position to be a long call and a naked call and as you know, the margin for nekedness is greater.